For current posts and the entire back library, go to http://siliconhutong.com

FITG

February 23, 2010

Before I do my deep-dive into the small shelf of books and articles on the PRC luxury goods industry that has been growing in my library, and before the ideas of their authors start altering my own impressions, here are ten guiding principles framing the business I've gleaned from working with luxury brands here.

1. Even if it is dead elsewhere, "bling" lives in China

2. Today, the majority of Chinese consumers are attracted to name brand and luxury goods because of the outward statement this makes about them and their success or style.

3. A smaller percentage of Chinese consumers are attracted to luxury goods because they believe that the brands represent superior quality, materials, and workmanship.

4. An even smaller percentage are identity consumers, who patronize a brand because it has become a part of who they are. These people, who have evolved beyond simply showing off and who expect quality as a given, patronize a brand because they could not imagine it otherwise.

5. Pre-lux brand customers are interested in buying brands but lack the wherewithal to do so. These are the biggest buyers of knockoffs, and some of them (but not all or most) will eventually buy the real thing.

6. Be aware of the post lux consumer. This is a consumer who can easily afford luxury goods, has a clear understanding of value, understands that value and style can be had for less money.

7. There is also the inconspicuous lux consumer. They want the quality and value of the brand but do not want - or fear - ostentation. Coddle them.

8. Company owned brand flagship stores are an essential part of establishing and building luxury brands in China. Not only do they provide an opportunity to experience the brand, its values, and its lifestyle, they also offer an place where consumers can be assured that they are procuring a genuine product.

9. Flagship stores are an advertising expense. Think of them that way, and worry less about actual sales.

10. Often consumers will be travelers or will have the wherewithal to travel internationally. You will sell to them in China but they will buy overseas to avoid import duties. Track them aggressively to ensure their sales are credited against your marketing in China.

February 14, 2010

In the face of a growing herd of commentators foretelling the rise of China, Niall Ferguson has identified what he believes to be the six factors that gave the west an opportunity to overtake and surpass China's early cultural and technological lead. He shares them with us in the Financial Times:

"What gave the west the edge over the east over the past 500 years? My answer is six “killer apps”: the capitalist enterprise, the scientific method, a legal and political system based on private property rights and individual freedom, traditional imperialism, the consumer society and what Weber probably misnamed the “Protestant” ethic of work and capital accumulation as ends in themselves.

Some of those things (numbers one and two) China has clearly replicated. Others it may be in the process of adopting with some “Confucian” modifications (imperialism, consumption and the work ethic). Only number three – the Western way of law and politics – shows little sign of emerging in the one-party state that is the People’s Republic."

One could argue with Professor Ferguson's conclusions, and as an (amateur) historian I have a problem with such deterministic models. Any number of ex post theories can be drawn to fit the facts, and Dr. Ferguson is neither the first nor the last to propose a reason for China's failure to keep up with the rest of the world during the Ming and Qing dynasties.

For the sake of argument, though, let us grant him his six "winning" factors. In return, he must grant that had he made a case for these six factors to European leaders 500 years ago he would not have been feted for his foresight. Rather, depending on the country in which he made the case, he would been ridiculed, cashiered, excommunicated, exiled, and possibly executed.

Plainly, there was no deliberate choice or point of determination where the west consciously chose such a path. It was a series of unrelated, non-sequential choices and events that brought about these changes, each important but few if any seen at the time as critical. Indeed, as my fellow readers of alternate histories will readily point out, at any number of junctures things could have gone a very different way.

It seems equally unlikely that we could foretell with any accuracy what factors will drive the rise of an Asian or African civilization in the future, or whether they would be as palliative as the happy factors that got the west to where it is today. Indeed, to assume that the influences that brought the west to its zenith are required for the east to attain its own apogee reeks of cultural hubris, wishful thinking, or both.

The political, cultural, economic, and ideological drivers behind the rise of each successive civilization in the history of the west - Babylon, Egypt, Greece, Rome, The Caliphate, Spain, England, and America, to name a few - have varied radically from one to the next. Certainly a professor of history at Harvard would consider that. Why might he believe this time would be different?

It is (to me at least) axiomatic that the forces and factors that will determine what nation, political system, or culture leads the world in the coming centuries are probably not what we think, and are likely not what Dr. Ferguson thinks, either. Those factors will emerge over time, and we will have to leave it to historians hence to sift such insights from our future.

No one would be happier than I if Dr. Ferguson is correct. Yet while I am warmed by Dr. Ferguson's implicit faith in the underpinnings of western civilization, we must all acknowledge that the road to the future of China and the world will likely be paved with somewhat different ideas and institutions.

February 11, 2010

The matter of Google in China is a growing hairball of issues that will, undoubtedly, become the subject of a book one day. Rather than try to take on the entire mess in a single go, I am going to pull it apart strand by strand to assess each of the problems in turn.

A previous employer and mentor, Mme. J.M. Claydon-Gescher, OBE, once told me that the wisest way to attack such a complex matter was to start with the biggest issue first. I haven't done that, because the biggest issue is the entire matter China's hospitality to foreign companies, which is a hairball unto itself that I will take on when I am done with Google.

So I decided to take on the next-biggest issue, which is why global Internet giants fail in China, and the result is on the Advertising Age site here.

February 09, 2010

In an excellent piece of Wall Street Journalanalysis on Toyota's mishandling of its quality recall, Jeff Kingston points out a host of problems that routinely turn otherwise outstanding Japanese companies into headlight-bedazzled deer in the face of crisis.

We'd Rather Not Talk About It

Kingston notices that there is something in the Japanese corporate culture that causes companies in crisis to go into communications paralysis. The real story behind the Toyota recall is that even this most admired of Japanese companies is utterly incompetent when it comes to the fundamentals of strategic corporate communications.

"The shame and embarrassment of owning up to product defects in a nation obsessed wit craftsmanship and quality raises the bar on disclosure and assuming responsibility. And a high-status company like Toyota has much to lose since its corporate face is at stake."

Kingston is brilliantly spot-on in his analysis, to the extent that his story should be translated into Japanese and duly memorized by every Japanese executive who ever seeks to sell a product outside of Japan.

Did They Export This, Too?

The only problem I have with the story is that Kingston implies that this particular form of non compus corparatus is somehow uniquely Japanese when in fact the problem is endemic throughout Asia. For all of their commercial, production, and engineering prowess, most of Asia's great companies share this giant blind-spot.

Twenty years ago, even ten, the severity of this problem might have been ignored. Protected by pliant local media all too ready to play down issues in deference to advertising dollars and coddled by governments at home and in countries where Asian firms set up large manufacturing bases, the specter of backlash was modest.

But in a world ruled by the radical transparency of the Internet, even the slightest stain on one's corporate laundry becomes a red flag for the world to see. And it is not just bloggers and tweeters driving this change, it is also a media desperate to sustain their relevance in the new information environment, and a nascent but growing anti-corporate, anti-globalization movement seeking to prove that corporations are, by design, malignant social actors.

In such an environment, an Asian company is dangerously exposed even on good days. On bad days - days like today as Toyota grapples with its current slow-motion nightmare - the company is on trial for its life in the court of public opinion.

The Blind Side

In over a dozen years in the communications business in Asia, I have encountered all manner of companies, startup to MNC, new and old, American, European, Japanese, Korean, Chinese, Singaporean, Australian. In all that time I have never had cause to discard my initial impression of Asian firms as almost utterly incapable of anything but the most planned, scripted, stilted and disconnected communications, suited for an age long past, and incapable of protecting themselves when the wolves come howling.

This must change, and it will, because the crises will not go away. Even after we stop reading about Melamine Milk, Lead-Laced Toys, Rotten Drywall, Tainted Dogfood and similar examples of Asian corporate moral failure, China's companies will discover that even enterprises with the best of reputations and purest of intentions can become overnight targets of a global foaming-spittle lynch mob.

The only question is how many fine Asian companies will be permanently damaged or destroyed, how many lives must be ruined, and how many fortunes must be lost before that happens?

The Fish Stinks from the Head Office

It is time to stop seeing corporate communications as PR, to stop seeing PR as the "press wrangling" function of marketing, and to stop choosing earnest and attractive but otherwise incompetent individuals to take charge of a company's reputation.

But let's make this clear: the fault here does not lie in the under-staffed, under-funded, under-appreciated PR departments stashed in back offices around the region. The problem goes all the way to the top. Poor corporate communications bespeaks inattentive or incompetent corporate leadership.

Until Asia's CEOs and managing directors start paying some careful attention to this problem, we are going to watch an embarrassing procession of our best firms self-immolate. After all of the effort to create world-class Asian companies, what a pathetic waste that would be.

So I thought it would be a good time for a wrap-up, and to address the issue that has been bothering me the most: the conflict between two American generals in the theater, General Joseph Stilwell, Chiang Kai-Shek's chief of staff and China-Burma-India theater commander, and General Claire Chennault, the retired Army captain who was Chiang's air advisor and the organizer of the American Volunteer Group (Flying Tigers,) and, after Pearl Harbor, commander of the U.S. Fourteenth Air Force.

Whenever I get into a discussion with someone who has read a bit on World War II in China, I usually find that person has developed a preference for one or the other: Stilwell, the crotchety old China hand, admired by those who like him saw Chiang and/or the Nationalist administration as the greatest barrier to China's success in the war; and Chennault, the leather-faced air pirate who saw airpower as the solution to Chiang's desire to fight the Japanese into a holding action.

Over the years, I have tended to sympathize with Stilwell because I saw the failings of the Nationalist government. Having just read a series of books on both sides of the question (and a remarkably contrasting series on the European theater,) however, I now see the issue very differently.

War makes strange trench mates, but the differences between these two were such that a clash was almost inevitable. Stilwell's background was privilege, Yankee, West Point, Infantry, and a soldier's general who was an army lifer with connections to Chief of Staff George Marshall. Chennault was hardscrabble, Southern, Air Corps, a tactical rebel (he wrote the book on pursuit aviation when the Army Air Corps thought in terms of heavy bombers) who had been medically retired as a captain before being hired to help rebuild China's Nationalist Air Force.

Stilwell was - nominally at least - Chiang's military Chief of Staff, but the two clashed constantly. Chennault was an expert hired to do a specific job, but curried favor with the Generalissimo and Madame Chiang through his Southern charm, his (relatively) cheap aerial victories, and his advocacy of Chiang's low-cost approach to fighting the Japanese.

There is much in the two men to suggest that together they could have made a superb theatre commander. But a closer examination suggests that this oversimplifies the command problems in the theatre.

Vinegar

Stilwell was a fighting general, so much so that he was nearly appointed by Army Chief of Staff George Marshall to lead Operation TORCH, the American landings in North Africa. Somebody then remembered that Ol' Joe had spent several years living in China as a military attache and could speak the local tongue, so at FDR's personal request Stilwell was sent to China. Georgie Patton went off to North Africa.

Even the eventual outcome of the war in the European theater do not automatically endorse that choice. For one line on his resume, the U.S. Army sent a fighting general to a theater that demanded a soldier diplomat. Not only was CBI a theater short on fighting forces and long on politics, for all of Stilwell's area specialization he either never understood the finer points of playing Chinese politics, or didn't care.

To put it charitably, Chiang was trapped between three forces: the Japanese, the Communists, and the byzantine politics of Nationalist China, while Stilwell saw only the Japanese. The General was left with a choice: try and change Chiang's thinking, forcing him to set aside his domestic rivals and focus on the invader, or find a way to wage war within the limits of Chiang's worldview. Stilwell chose the former - not a bad choice, but one that demanded patience and diplomatic skills beyond Stilwell's ken.

And while correct in doubting Chennault for his almost religious belief in the decisive role of air power, Stilwell was no less parochial in his incomplete appreciation of what air power could accomplish on the battlefield.

(Pentagon wags described Stilwell as the best four-star battalion commander in the Army. The jest was accurate with regards to Stilwell's acumen, but its implied criticism of Stilwell's command style ignores the importance of leading a Chinese army from the front.)

Had Stilwell been a corporate executive in 2009, I would have categorized him as the China Hand Curmudgeon, someone who would never let the Chinese slip one past him, but whose distrust would create permanent barriers between him and local partners and subordinates that would preclude success.

In the end, perhaps, the fault lay with Stilwell's assignment. No one in Washington truly understood what his role demanded, and as a result sent the wrong man to do the job.

Tabasco

Chennault was in the right place at the right time, in a region nobody else wanted to be in, with the support of the local head of state. A thoughtful if not visionary aerial tactician, he not only lacked an appreciation for ground war and what we now call "combined arms" battle, he was drunk on the War Can Be Won From The Air Kool-Aid that was and is the chosen nectar of birdmen everywhere.

These failings were unique to neither to Chennault nor to World War II: indeed, the U.S. military has spent much of the past six decades trying to stamp out parochialism in both attitude and thinking. But in a theatre so thin in leadership and strategy, his failings were magnified. Chennault ignored the ground war to such an extent that he found himself evacuating forward airbases because he had laid no plans to defend them against Japanese infantry.

While Chennault's strengths were in tactical aviation - stopping the other guy's bombers and providing close air support - his focus shifted to trying to win the war through strategic destruction of the enemy's backfield, nearly to the point of forsaking the troops on the ground. In the early part of the war, when ground action was light and his resources few, this may have been the better choice. But his persistence in this strategic focus when the need for tactical support was greater and in view of the limited resources at hand suggest a hunger for glory rather than military calculation drove Chennault's thinking.

And while Chennault got along with Chiang far better than the more expert Stilwell, one is left with the impression that the mutual good-feelings were driven either by Chennault's political naivete, lick-spittle kow-towing to Chiang as his patron, or a willingness to play ball with the Generalissimo as a means of furthering his own interests. (Chennault's lucrative postwar role in Chinese civil aviation does little to dispel such cynicism.)

Chennault, in a word, went local, and regardless of his reasons for doing so it weakened him as a commander and, I would argue, undermined American unity in China and limited Allied bargaining power with Chiang. The consequences of the latter can only be imagined.

The Leaders We Have

In a much-criticized rejoinder to troops in Iraq complaining about America's lack of material readiness for the 2003 invasion, former Secretary of Defense Donald Rumsfeld told a group of assembled soldiers that "you go to war with the Army you have."

Source and circumstances notwithstanding, the remark is an historical truism, in particular when it comes to leadership. In World War II the shortcomings of leadership in the US armed forces were most evident in the China-Burma-India theater because not only did we have to work with the leaders we had, we had so few leaders there.

As I read Rick Atkinson's magisterial "Day of Battle" about the Italian campaign in World War II, I was struck by how the imperfections of one American army commander were somehow compensated by other officers around him. Lucien Truscott balanced Mark Clark, Omar Bradley balanced George Patton, and somehow Eisenhower, thrust into the role of Chief Military Politician, held it all together amidst competing national agendas and egos.

China and "Deep" Leadership

The CBI theater lacked the depth of leadership that would have compensated for the weaknesses of Stilwell and Chennault, allowing them to play their roles but ensuring that their failings never stood in the way of success.

But perhaps of greatest relevance, a study of Stilwell and Chennault underscores that in war, as in all human endeavors, "great" leaders are usually just the most visible element a larger team of leaders working in obscurity. The best leader, without others to compliment or offset his shortcomings, will struggle to reach his full potential.

Too readily linking the lessons of war to the conduct of business is a suspect practice. But my own experience makes clear that the enterprises that succeed in China - foreign or Chinese - are those with the strongest bench of leaders, and top men who are not afraid to be second-guessed and corrected by their juniors.

You go to war - or market - with the leaders you have. Better to have more leaders, in this case, than less.

January 01, 2010

Recovering on Orchard RoadIs this my second or third iced tea?1318 hrs.

The image of unsung heroes scraping a truck route through the planet's densest jungles and highest mountains - under fire, no less - to feed and arm the people of China was too good to resist, so it was with great anticipation that I picked up Donovan Webster'sThe Burma Road.

What I was hoping for was a dramatic and detailed retelling of what it took to construct this feat of combat engineering and human endeavor, so initially I was disappointed. (Lesson one: pay more attention to subtitles.) Using the construction of the road as a backdrop, Webster chose instead to cover the entire China-Burma-India (CBI) theater in World War II, with an emphasis on Burma and India, and some of the more colorful personalities who drove the progress of the war in this part of the world.

CBI for the Rest of Us

As a campaign history the book suffers, perhaps unfairly, because the standard for World War II historians has risen drastically in recent years. Just when you thought everything about the conflict was that could be known or written has already seen the light of day, we have had a cascade of superb books that have, in many cases, redefined how we relate to and understand the war. Three examples among many:

The first two books of Rick Atkinson's planned "Liberation Trilogy" (the Pulitzer Prize-winning An Army at Dawn and the even better Day of Battle) not only amount to the best accounts of the North African and Italian campaigns ever written, they are compelling a complete rethinking of how we must view the war in Europe.

Over in the Pacific, John Parshall and Tony Tully, both part-time American historians, have written Shattered Sword, an account of the Midway battle emphasizing the Japanese side that casts new, unexpected, and iconoclastic insights on the American victory in that pivotal battle. So much for the Hollywood version.

Edward S. Miller, another gifted amateur historian, offers in his superb War Plan Orange and Bankrupting the Enemy, together bringing to light the long overture to the war against Japan that most popular histories skim or ignore completely.

Burma Road does not approach the insightful yet accessible scholarship of those accounts. What Webster does instead is to consolidate the works of others with his own on-the-ground research to fill a gaping hole in the popular history of this "tertiary" but locally critical theater in World War II.

Most works about CBI have focused on either personalities (Stilwell, Merrill, Wingate, Chennault) or units (the Flying Tigers, the OSS, the Marauders, the Chindits). Webster pulls these disparate threads together into a single tapestry that gives a good feel for the region's "War-on-a-Shoestring" as the world focused on Europe, Africa, the Atlantic, and the vast Pacific.

Picking Nits

I have a list of minor quibbles with the book, most of them rooted in Webster's background as a journalist rather than a military hitorian, that are illustrative of the issues that might keep The Burma Road from taking its deserved place among popular World War II histories:

Webster refers to an officer "retiring his commission" when what was meant in the context was "resigning his commission."

Throughout the text, Webster comes across as something of a Stilwell partisan. I tend to sympathize with "Vinegar Joe" myself (his assessments of Chiang were politically incorrect but fairly accurate), but his lack of political acumen consistently undermined his tactical strengths.

The maps in the work are far too few, and the few there are are not very helpful in orienting the reader. What is worse, the symbology - the way he represents different units and their movements - would cause a corporal to giggle.

Despite these quibbles, I enjoyed Burma Road and at a well-written 335 pages, I found it a worthy read, if for no other reason than it gave me a new point from which to re-commence my own studies on the CBI theater. For anyone largely unaware of the progress of the war on China's southern border, I highly recommend it.

December 07, 2009

The pitch seems to be going well. There is good chemistry between the prospective client and the agency. The ideas are great, the concept clear, the tactics doable, the team qualified.

And then comes that moment where everyone sits back, and someone on the client side folds their arms, looks the agency leader in the eye, and asks "so how are you going to measure the effectiveness of your campaign?"

Usually the agency will have some sort of answer, and occasionally it will be enough to satisfy even the procurement person sitting in on the pitch. But as someone who has sat through countless pitches on both sides of the table and have made more than my share, I have yet to hear an agency give the correct answer:

"I am sorry, but isn't that your problem?"

You Want Us To Do What?

The idea of holding an agency accountable is a great one. Far too much money has been hurled at marketing (not just television advertising) based on little more than the assumption that the only bad marketing is none at all, with the primary beneficiaries being media and agencies. But accountability goes bad when the agency is handed the task of measurement.

The first problem with asking an agency to be responsible for monitoring the efficacy of their own campaign should be self-evident: it is like asking the fox to guard the hen-house. The agency has an implicit conflict of interest.

When asked to provide measurement, most agencies will endeavor to use the metrics that best validate their own approach. What is more, by giving the agency (under pressure from both client and upper management to perform and retain the client) the responsibility to handle measurement, you give them both the motive and opportunity to "game" the results. This is not a condemnation of agencies: it is merely an acknowledgment of human nature.

One Yardstick to Rule Them All?

The second problem is that measurement, particularly in this day and age, is not (or should not) be the same for every company and in every situation. The use of standardized metrics like gross impressions, page views, ratings, ad-value equivalencies and click-throughs is helpful when comparing one marketing program to another. Yet they all suffer the same shortcoming: they are weak measures of how close a company is getting to reaching its specific business goals.

In any market, but especially in a place like China, goals are constantly changing as a company evolves and targets shift, and I would argue that different markets (geographic or product based) need different metrics. The way you would measure the marketing campaign for a "hero" product in a developed country is different than the way you would measure a campaign for a very-low-margin product in a developing one.

For these reasons, agencies should not be in the business of designing marketing metrics for companies. That responsibility belongs with each company, deciding what its business goals are, understanding how a marketing campaign can get the company to that goal, and then devising the way the agency (and the marketing team as a whole) will be measured in its performance.

Chief Measurement Officer

This means that the first and most important challenge of a new Chief Marketing Officer (CMO) - is not to call an agency pitch. Rather, it is to create a measurement system that all of a company's leaders agree is tightly aligned with the firm's business goals. The second challenge, in that case, is update and evolve that system as goals change, as tools change, and as more accurate means of measurement become available.

When, and only when, that system is in place is it time to seek agency help. Yet even when that time comes, the only measurement responsibility an agency should be given is to perform against the metrics set by the client on the basis of the client's own business goals. Those metrics should be made clear in the pitch, and should be the focus of regular update meetings. Ideally, the measurement system should be real-time, so both agency and client can respond to critical data quickly.

Revolution is No Cocktail Party

If you think all of this is designed to go easy on the agency, you miss the point. This approach would require an agency to perform against different metrics for each client, and for that reason I suspect many agencies would be dead-set against it. (Many in-house marketers will be as well, because it places a greater burden on them, too.)

But before we dismiss this approach out-of-hand, consider the future. The marketing craft is going through a time of profound crisis. A deep vein of skepticism, disbelief, and distrust of traditional marketing tools is coming to the surface, exposed by the erosion caused by the financial crisis, a general movement for greater fiscal accountability, and what can best be characterized as Advertising Budget Growth Fatigue.

If we want to have the credibility that entitles us to influence at the highest levels of our companies, it is incumbent on us to do everything possible to demonstrate the value of what we practice, and to guide our practices toward strategies and tactics that deliver greater value. That means a creating and building a toolkit of metrics unique to each company that ties every marketing dollar to sales, to repeat business, and to individual customer relationships.

October 14, 2009

Uber-establishment public intellectual and Newsweek International editor Fareed Zakaria does a decent job calming the otherwise financially panicked in a pallative column from June 13.

What I found most intriguing about the article was the conclusion (proving, once again, that it does occasionally pay to read long essays all the way through,) where he explains that the West is in the throes of a crisis of morals as much (or arguably more) that a crisis of finance. When he first started this bit of his rant I shook my head. "Yes," I thought. "We've all heard this before - the old Wall Street is an Ethical Wasteland argument, with Bernie Madoff, Allen Stanford, Alan Greenspan, Wall Street traders, and subprime mortgage brokers all trotted out as poster children."

But then Zakaria pointed out that Wall Street was not alone.

"Most of what happened over the past decade across the world was legal. Bankers did what they were allowed to do under the law. Politicians did what they thought the system asked of them. Bureaucrats were not exchanging cash for favors. But very few people acted responsibly, honorably or nobly (the very word sounds odd today). This might sound like a small point, but it is not. No system—capitalism, socialism, whatever—can work without a sense of ethics and values at its core. No matter what reforms we put in place, without common sense, judgment and an ethical standard, they will prove inadequate. We will never know where the next bubble will form, what the next innovations will look like and where excesses will build up. But we can ask that people steer themselves and their institutions with a greater reliance on a moral compass."

(Italics mine)

Leave aside for a moment the problem that when you start blaming society, you deflect the blame from the bad guys. I do not get the impression that this is Zakaria's intent.

No More Higher Ground

Zakaria makes two points, one implicit, one explicit but not sufficiently so, that we need to take into account for China.

The first is one I have discussed and heard from other China hands over the past year. Anyone who thinks that Chinese leaders and the Chinese people are blind to the malfunctioning moral compass in the West - especially in the wake of current events - is wrong. If we ever were in a position to preach, either at a systemic, enterprise, or personal level, we have lost that position.

And that means that any American who excoriates corruption in China will be dismissed as a hypocrite; any foreigner who tries to explain to a factory owner why it is better to make produts safer will be held to a higher burden of proof; and any executive trying to preach the importance of integrity and ethics to a recent recruit will face annoyed skepticism.

The Law of Rules

But the larger point - the one I do not think Zakaria makes plain enough - is that rule of law is not all that we have made it to be. As we talk about China's development, we attach to the concept of "rule of law" a Holy Grail-like quality, as if the quest for the rule of law, as much as finally attaining it, will be the answers to many of China's major social challenges.

In pointing out that in America, the paragon of societies living under a fully developed body of law, legislative process, and criminal and civil court systems, is deeply socially flawed in spite of the rule of law, Zakaria sends us a warning about China, one that will discomfort many of us. Rule of law, as important a goal as that may be for China, is inadequate to ensure that leaders, enterprises, and people behave in ways that are not sociopathic.

A rule of law must be paired with what I would call a Law of Rules, a detailed code of behavior that is rigid enough to withstand relativism, is adaptable enough to stand despite massive social change, and is set forth by a body or entity that operates at a level removed from our own unlimited ability to rationalize almost any behavior. Law of Rules is more than just a moral compass. It is a clear description of how to live, so that the rule of law - the nation-specific constitutional, criminal, and civil codes standards of behavior - need only come into play in exceptional cases. The rest of the time, it is our fear of doing wrong and our desire to do right that guide us, not the fear of the cop, the lawsuit, the jury.

The Law Gone Missingin China

Twice in the last hundred years, China has had its Law of Rules stripped away. The first was what might best be called Confucianism, an imperfect but longstanding code of behavior rooted in a system of rigid interpersonal obligations. Ripped away in the aftermath of the 1911 overthrow of the Manchus, it died a slow death, and was eventually replaced by Maoism.

Maoism was battered by almost continuous challenge and upheaval, until finally its precepts of egalitarianism, service, self-sacrifice, and patriotism were abandoned in the 1990s. What replaced them were two simple maxims: "To Get Rich is Glorious," and "It doesn't matter if the cat is black or white, as long as it catches mice."

Now, we are told, all that we need to lay upon this highly practical foundation is a legal system backed with apolitical courts, and everything will be fine. Not bloody likely. If the fear of prison and death are not enough to keep the chief executive of a dairy from making decisions that will kill babies, no rule of law can hope to end such behavior.

There is no silver bullet solution to this problem for China, no simple path to change, because the change that must take place is not in institutions but in individuals. This is not one battle, but 1.3 billion battles. And for that reason, it is the greatest single challenge facing China today.

October 07, 2009

The Financial Times has a style of reportage that I would place somewhere between a newswire and The Economist. The reporters are superb, the coverage is excellent, and I happily pay my monthly subscription for online-only access. But because of that same style, the FT all too rarely delivers stories that can deliver memorable analysis and insight. Those sorts of things tend to get shunted into "special reports" and the opinion section.

But occasionally there is an exception, and Sundeep Tucker and Jamil Anderlini penned one in early July entitled "Exiting the Dragon," which chronicled the recent spate of global banks divesting their China financial holdings, putting that activity into the context of the troubles that the global financial industry has faced in trying to build businesses in China.

M&A is Not Strategy

As frequently happens when journalists dive deep into a topic like this, a host of other issues emerge that, while peripheral to the thrust of the article, are precious nuggets in their own right. The one that stopped me was this paragraph about China and strategy:

"The strategic aspect of these deals was always overstated,” says Lonnie Dounn, formerly of HSBC in Asia but who in 2005 was named chief credit officer of Bank of China, becoming the first foreigner to hold a senior executive position at a top mainland lender. “The Chinese banks did not want to give the foreign banks access to their best customers and the foreign banks did not, going in, have clear strategies for the Chinese market,” says Mr Dounn, who is no longer with BoC."

(Italics mine)

Dounn makes the single most important point that needs to be learned by both U.S. companies entering China, and by Chinese companies stepping into overseas markets. An investment, an acquisition, or a merger is not a strategy. They are tactics, and to make an investment strategic it must be a logical and necessary component of a clear and practical strategy.

So Much for Guanxi

Notwithstanding the substantial capital gains earned in the process, I would wager that a lot of these investments - Bank of America's stake in China Construction Bank, the Royal Bank of Scotland's holdings in Bank of China, and similar purchases by UBS and Citigroup - were at their core a form of capital-based government relations. By investing a lot of cash for nominal stakes in state-owned banks, western financial institutions were attempting to demonstrate their commitment to China to policy makers who in turn could grant access to China's growing commercial and retail banking sectors.

All of that would have been fine if these investments really purchased any substantive and enduring goodwill. I would suggest that China gained little through these investments in the first place, and as such the banks gained little favor in Beijing for their trouble. Sadly, whatever goodwill there was has been liquidated along with the holdings. Global financial crisis notwithstanding Chinese leaders, businesspeople, and consumers do not appreciate companies that swear a deep and enduring commitment to the market, only to pack up and pull out when things get a little tough.

And memories are long here.

The Accidental Victory

One could argue that the banks that have cashed out of Chinese financial institutions are probably better off taking their profits from their investments than they would be in undertaking a massive and distracting effort to win over Chinese enterprise and consumer customers. That may well be the case, but given that this did not seem to be the motivation behind the original investments - or behind the divestments - the banks simply lucked into this. If the past two years have proven anything, it is that hope is not a dependable strategy for financial businesses.

If the banks in question were hoping to use these investments to root themselves into the Chinese financial industry at a critical point in its development, with a view to being a player in Chinese commercial and retail banking at some point in the future, they have failed utterly.

May 21, 2009

It is no secret that the economy-class sections of trans-Eurasian and trans-Pacific flights are increasingly filled with refugees from the global financial crisis, people intent on finding new lives and careers in the Wild East.

Aimee Barnes has written a post filled with thoughtful advice for these fortune-seekers (Falling in Love with China, and Your Career), and in the spirit of her exercise I want to add the following, posted on The Old Silicon Hutong in January 2006, but even more relevant today:

IF YOU’RE GOING TO GO EAST, YOUNG MAN, DON’T WAIT FOR SOMEONE TO BUY YOUR TICKET

It seems like every week or so I get an e-mail from a young person who is interested in finding work in China, and sends me a resume asking for my help. Nearly all of them are well-mannered, articulate, and well-informed about the region. I’m always happy to help.

But what I have discovered is that a large percentage of the class of 2005/2006 [NB: and 2009/2010] are not willing to actually come out here to seek their fortune. They would rather wait for the offer. I once thought that way, and it was the biggest mistake of my career. I’ve discovered since that the right thing to do would have been to get my ass on a plane and come out here - it would have saved me at least two years of scraping by, living in the guest room of a friend’s house, and working in jobs with limited prospects.

I want to help others avoid that, so this is the advice I gave today to one recent correspondent:

Not sure if I ever told you this, but between 1993 and 1995 I spent nearly two years trying to find a job in China from my home in California. I sent out 500 resumes, shook the guanxi tree, even published a quarterly China business newsletter. When I finally got a bite (from a newsletter subscriber), it was enough to get me over to China, but not the ideal job. Once here, however, I’ve never been unemployed for more than 60 days.

The primary reason for this is that most hiring decisions for China and Asia positions - even for multinational companies (PR, advertising, and others) - are made on the ground here in the region. If anything, this is more the case now than it was a decade ago, as most firms have so expanded their operations in the region that the Asia HR function is managed separately.

Because there are a decent number of applicants in the region, companies will only pay your airfare and expenses to come out for interviews under exceptional circumstances. Doing so is an expensive, high-risk proposition, and most companies choose not to take it. What this tends to mean is that if a company has to decide between two candidates, one in the US and one close by, the one already in the region gets picked, even if the one here is slightly less qualified.

On the other hand, executives and HR directors give high regard to someone who has come to Asia under his own steam. They tend to think that it demonstrates a commitment to the region and a high degree of personal initiative. The importance of initiative should be pretty self-evident. The importance of commitment cannot be understated. I can’t tell you the number of young people who get hired, come out to Asia, spend 2-4 years here, then decide “you know, I want to go back to the US and go to graduate school,” or “Asia is just not for me,” or “I’m afraid of being pigeon-holed as a China or Asia person, and the effect that might have on my career.” While understandable (except for the pigeon-hole case), such issues are frustrating for companies who invest heavily into the training and development of a young executive, only to see that individual pack it in and head back to the U.S. at just about the time they are starting to deliver a return on this investment. Commitment, therefore, is increasingly critical.

Trust me, I understand how difficult it can be to leave behind a secure home and 3 squares a day to do something like this. But even if you just manage to line up a couple of weeks of meetings and interviews, the price of a round-trip ticket on Air China or Northwest and a few nights hotel is well-invested. One young lady I now was finishing up at the University of Washington two years ago, and had been working as a waitress and a trainer at a national casual dining chain. She got a couple of weeks off of her job during the vacation, about a month before which she sent out a bunch of resumes, following up to line up meetings. By the time she got here, she had a full card of interviews. We didn’t quite hire her on the spot, but close. She came back, did an internship for 3 months, and we hired her. She was promoted within 18 months, and now heads the research department at B-M China.

Again, my goal is not to lecture, but to help set your expectations and to provide you with how I think you might best go about landing a job here. You may well be successful getting hired from where you sit, but I can say that the percentage of young, non-Chinese entry-level managers who get hired from the U.S. is small compared to those who are hired from here.

I’m not sure how he’ll take that, but I’m hopeful. Because I get a call or email every ten days or so from a friend or acquaintance who is looking to hire people like this.

February 05, 2009

Jason Dean at The Wall Street Journal is reporting that Lenovo has replaced CEO Bill Amelio with Chairman Yang Yuanqing, and that co-founder Liu Chuanzhi is returning from his pasture to resume a seat on the board. They're also upping senior VP Rory Read to the new role of Chief Operating Officer and President, and the company has decided to re-focus itself on it's home market, China.

Bring on the Empty Horses

The announcement poses more questions than it answers.

We do not know what Mr. Read's duties will be in his new position, so we cannot assess to what extent the promotion was made to tap his talent, and to what extent there were other political or perceptual considerations involved.

We do not know to what extent this is a sign that Lenovo failed to effectively integrate the IBM PC division, to integrate the executive teams, and to meld its product lines, and to unite the cultures of the two companies. Lenovo has kept up a veritable sunshine pump of positive messages about how smooth the integration process was, and have effectively kept any discouraging words from sneaking out.

And we do not know the significance of Mr. Liu's return to the board, what forces brought him back, or what value he is expected to bring.

M&A is not a Global Marketing Strategy

At the same time, there are already lessons to be learned from the Lenovo-IBM saga. Purely from the perspective of marketing strategy, there are three that pop up immediately.

First and most important, as Chinese companies look to expand beyond the borders of the People's Republic, they should now see that mergers and acquisitions are no substitute for a global marketing plan. I am not certain what Lenovo thought it was buying when it purchased the IBM PC business, but if Lenovo thought it was purchasing a market position, it was wrong.

What the IBM purchase did give Lenovo was instant capacity to sell its products around the world, and to that extent the merger made sense. But that capacity only had value as long as it had world-class plans, products, leadership and support. Facing a rampant Apple, a resurgent Hewlett-Packard, and a humbled but determined Dell, Lenovo also needed forceful, and, focused, and capable leadership to turn the unified team into a winner against powerful competitors.

Winning against vigorous and entrenched competition is tough enough. Having to do so while integrating two strong and linguistically distinct corporate cultures must have added a maddening level of complexity to an already brutal challenge.

The World is Way Too Much

Second, trying to take on the entire world at once was ambitious in the extreme. Keep in mind that before the merger, the Lenovo team was struggling with its market toe-holds outside of China, and the IBM team was struggling to profit from its global market. A more modest approach was in order.

Rather than seeing this as Lenovo's opportunity to "globalize," the company's leadership might have been better off thinking of the merger as an opportunity to "internationalize" (a favored term among Chinese companies looking to expand beyond Greater China), focusing on a smaller number of markets where the combined company was strongest. (In fact, Dean's article in today's WSJ suggests the company will be doing just that going forward.)

After a merger of this magnitude, customers and employees in each market around the world expect the new company to spend a lot of time and effort explaining what the merger will mean to them. Who is Lenovo now? What is our vision for our company, our product, and our customer? And why should you, customer/retailer/employee/whomever, care?

Making that challenge even more complicated, each market has a different set of perceptions and expectations that need to be addressed, meaning that the effort has to be unique to each market.

It is hard to say whether Lenovo undertook that effort. But even if it did, doing it all at once in dozens of markets around the world would have overtaxed even the most capable, most tightly integrated marketing and communications teams in the world.

We're an American Brand

Third, the August 2005 decision to dump the "IBM" brand from products sold outside of China - five years before Lenovo was obliged to do so and mere months after the deal was finalized - will likely go down as one of the great mistakes in the history of brand management. The decision was made public in buried lede in an FT piece by Mure Dickie:

The focus on [ThinkPad and ThinkCenter] product lines marks a decision to play down use of the IBM brand for products made by the US company's former unit, even though Lenovo acquired the right to use the IBM name for five years.

It's a smart gamble for Lenovo, some analysts say. Using IBM's well-knwn Think brand has been helpful, but it won't do in the long run. 'The Band-Aid has to come off at some time,' says Samir Bhavnanii, principal analyst at San Diego-based PC consultancy Current Analysis. 'They need to establish the Lenovo brand and start thinking about their computer company as Lenovo, not IBM.' According to Bhavanani, this is the only way Lenovo will be able to break into the big leagues. 'If they want to compete as a global brand with Samsung, Dell, and HP, they need to get people to start thinking of Lenovo as Lenovo.'"

I do not disagree with the larger gist of the statement, but as I argued in August 2005, the problem was timing. (Apologies for the long quote and the fact that I was fasting and a little irritable at the time, but I think I phrased it fairly well and I wanted to convey my incredulousness at the time.)

As regulars here will recall, the primary reason I was a supporter of Lenovo's IBM purchase (from Lenovo's standpoint - it was a no-brainer for IBM) was that Lenovo was going to have an opportunity to leverage the IBM brand for five years while it built credibility with customers. Anyone with just a little business sense knows that's worth something.

In fact, it's worth a lot. According to the August 1 edition ofBusinessWeekand InterBrand, the value of the IBM brand - the third most valuable brand in the world behind Coca-Cola and Microsoft - is US$53,376,000,000.00. My point back in December was that Lenovo wasn't buying a money-losing business for its $1.7 billion in hard currency, it was renting a highly usable $53 billion brand asset for a mere $350 million a year.

But Lenovo, under the expert guidance of Chairman Mr. Yang Yuancheng, apparently feels that not only do customers not need a transition, but Lenovo is unable to utilize a $53 billion asset to their benefit, an asset that they paid cash for and an asset that, arguably, was about the only useful thing they took from the deal.

Is the use of the brand "Think" worth that kind of money? I'm sure it's worth something, but I'm not sure it's worth $1.7 billion. And due to some stupid decision making at Lenovo, that's all the company is getting for its cash.

If I were a Lenovo shareholder, I'd be screaming. Five years usage of a $53 billion asset tossed into the garbage? In the U.S., that would be grounds for an uprising at the next general meeting, and grounds to question the competence of management, and any auditing firm with a conscience would require a write-off of those assets as a one-time charge against earnings.

The burning question is "why?" I'd suggest one or more of the following reasons:

1. Lenovo leadership just doesn't understand the esteem the IBM brand retains worldwide. Entirely possible since I'm not sure the Chinese side of the Lenovo house much understands the market outside of China.

2. Lenovo has no clue how to use the IBM brand. Also possible because they didn't know how to use the "Legend" brand, and they did a poor job building the Lenovo brand in countries where they lacked explicit government support and fawning-lapdog media endorsement.

3. Lenovo is ignoring it's advertising and PR agencies on a) the value of the brand, and b) how to use it. Having worked with Lenovo in an agency relationship and walked away when they weren't listening to either us or our competitors, I'd say this is a pretty real possibility. Salesmen and Engineers rank highly at Lenovo. Marketers do not.

4. Lenovo's advertising and PR agencies are incompetent and not pointing this out to Lenovo, or are terrified to do so because they think they'll get sacked for talking back. Also possible, because who knows where Lenovo is actually getting assistance these days.

5. Somebody really high in the Lenovo organization genuinely believes that the Lenovo brand means more to businesses and consumers outside of the PRC than what it really does, which is "Made in China by a Chinese Company - Beware."

Take your pick. I have my prejudices.

I genuinely hope Lenovo's management reconsiders. If they don't, I hope they're prepared for the consequences, which they quite clearly appear to have underestimated. If nothing else, they will have screwed themselves out of the biggest asset they got from IBM.

As I said, a mite harsh, but it makes the point. Had Lenovo ejected the IBM brand and followed it with a massive global effort to drive awareness, positive perception, credibility, and trust of the Lenovo brand in its place, discarding the IBM brand would have been a ballsy move. But both at the time and now in hindsight, that decision paints an unflattering picture of decision making at the top of the company.

Whither Points the Finger

Thus far the global economy and no less than two non-Chinese CEOs (Amelio follows his predecessor, Stephen Ward, out the door: Ward lasted just over seven months) have shared the implicit blame for Lenovo's fortunes. The latter have paid with their jobs.

In the coming months, however, the media and analysts will begin to turn their forensic attentions to the man who, in the words of author Ling Zhijun in The Lenovo Affair, "played a decisive role in the acquisition" of IBM-PC in the face of "serious" opposition from members of Lenovo's board: Yang Yuagqing.

It is instructive to remember that Lenovo co-founder and then-Chairman Liu Chuanzhi stepped aside after the merger, leaving the task of merging and running the combined company to Yang and Ward. In that light, it is even more interesting that he is coming back now. To those of us fond of the ancient and honored practice of reading tea leaves here in Beijing, the implications are compelling.

If I were a betting man, I would wager that there is a debate taking place behind closed doors at Lenovo headquarters in Beijing and in government offices around the capital about whether or not the IBM acquisition was the right call, whether it was handled well, and where the blame lies for its mishandling.

Make no mistake: the next few months will be critical for Lenovo, and they will be the deciding factor in Yang Yuanqing's career with the company. His task will not be easy, and he will be second-guessed at every step.

December 08, 2008

(Note: I wrote about Obama, China and Public Diplomacy in a Viewpoint piece on November 12 for AdAgeChina. The article is behind a subscription firewall, so I have expanded on, updated and revised it below for the benefit of Silicon Hutong readers.)

Now that Barack Obama has made his key foreign policy appointments, speculation and punditry is now turning to the shape that U.S. foreign policy will take after January 20th. When Barack and Hillary sit down to compare notes, I suspect that getting out of Iraq, staying out of Iran, fixing Afghanistan and North Korea, engineering a new Bretton Woods, and repairing ties across the Atlantic will probably top their lists.

Somewhat further down that list will be America's relationship with China. Given a full slate of issues, I am sure the President-Elect will be tempted to maintain the status quo, even if that may cause him some ideological discomfort.

I hope he resists that temptation, but not for the reason others might give.

A Different Audience

Since Henry Kissinger's first secret trip to Beijing in July 1971, the modern history of Sino-American relations has been conducted between U.S. diplomats and political leaders and a relatively small elite in the Chinese government. That same small elite, spread across the Party and the bureaucracy, has directed national policy, editorial bias, and public attitudes toward the United States.

When President-elect Obama is sworn into office, he and his foreign policy team will face a China that is different in subtle but fundamental ways from the China that each of the four past U.S. presidents faced upon entering office.

First, while the government and party remain in control, the means by which decisions are reached is evolving. China is increasingly governed through a process by which consensus is reached among groups and policy makers, or as I like to say "one party, many factions."

Second, this change has opened a window for groups outside of the government to exert more regular influence on policy making. While China's leaders and bureaucrats still operate in a system where they are free to ignore public opinion when they forge policy, they are (for a variety of reasons) seeking more input from business leaders, academics, foreign experts, and even the public itself.

Third, this is all taking place in an environment where the role of the web is growing in China, and the permissible scope of discourse is wider than most non-Chinese appreciate.

That all of the above has implications for the way companies do business in China should by now be axiomatic. What has not been explored is its importance to diplomacy. Because what this means is that the cauldron in which perceptions, attitudes, and policies are formed now includes a growing helping of public discourse.

Obama's China Challenge

This has critical implications for the approach the Obama administration needs to undertake in order strengthen U.S. ties with China, especially as many of the new administration's actions to address the daunting challenges it faces will be seen as running counter to Chinese interests. The Bush-Paulson Strategic Economic Dialogue was not without value, but it has shown its limitations in the wake of recent events. If Obama is to keep his hard choices from backfiring with China, he must make his case to both the Chinese government and the Chinese people.

And to be sure, Obama will need China. To see how much he will need to forge a true trans-Pacific partnership requires only a quick glance at the list of issues he faces. At the very least, China will be essential in forging a global energy and environmental regime, bringing security to Central Asia, ensuring that Russia remains integrated in the global system, midwifing North Korea's return to that system (and perhaps its peaceful re-unification with South Korea), and, of course, resolving the current global financial crisis and forming new system to both nurture and regulate international finance.

Speaking to the Chinese People

Conventional diplomacy will form a part of the Obama administration's effort to enlist that support, as it should. But in the current environment in China and the world, it will not be enough. Once in office, the President-elect and his team will need to undertake an unparalleled effort of public diplomacy to engage China's wider policy environment. This effort must shun the neo-propagandist tools and tactics of the Cold War, creating instead strategies, approaches, and messages more appropriate to a world rendered naked by the Internet.

That effort needs to be built on a foundation that includes, as a minimum, four fundamental steps that should be implemented by July 2009:

First, the administration must begin the effort to create (simplified) Chinese-language versions of nearly every public-facing U.S. website on an agency-by-agency basis. Some, like the Department of Defense, will and should be limited in their international friendliness. But others, like the Departments of State, Commerce, Treasury, Agriculture, and Transportation have immediate value and applicability in delivering US messages abroad, as does the White House site itself. This effort alone will open channels of communication that have been heretofore closed for no good reason. Meiguo.gov, maybe?

Next, the administration needs to learn how to listen to China's public voices. While this begins with engaging businesspeople, academics, editors, and other influential types, it has to delve far beyond the elites and find ways to listen to the people of China. Polling won't work. Far better to find a way to listen to what they are saying to each other, and China's blogs and online forums are an excellent place to begin. In lieu (or in advance of) creating an office in government to do that, independent contractors could be brought to begin delivering this information quickly and efficiently to every section of government.

Third, as the administration builds the capability to conduct its public diplomacy, it would do well to draw from the toolkit it created to win the election. Banished should be the United States Information Agency (USIA,) the Voice of America, and the feeble attempts to date by the U.S. government to use the Internet as a diplomatic tool. Any government can conduct propaganda. Given our tarnished credibility, America needs to win hearts and minds through engagement, not pronouncement.

This means learning how to make appropriate use of all of the online tools available to the administration that are popular among China's people. Trying to use tactics that worked in the U.S. would miss the point. Public diplomats must learn how to use the channels frequented by China's netizens in a way that will seem appropriate to those netizens and to China's leaders. That means treading lightly.

Finally, the administration must realize that to be effective, American public diplomacy must incorporate a substantial P2P element. Obama's efforts to enlist the help of all Americans in the changes he advocates would be well directed to an effort to rebuild our frayed reputation. In the long run, it will be the relationships between individual Americans and Chinese that will form the basis for grass-roots support for America in the homes and on the streets of China.

Walk First, then Run

The one impression I do not want to leave is that the administration should rush into this effort with great fanfare, with oversized expectations for near-term wins, or with the desire to create a massive new diplomatic bureaucracy. The art of diplomacy was not created overnight, and the Cold War public diplomacy I refer to above was itself a constantly evolving effort. It will be no different with the new public diplomacy with its new tools, new approaches, and new audiences.

What must happen quickly, though, is to recognize the challenge the U.S. faces in the reconstruction of a badly-damaged global reputation, to understand the value of the Internet and its myriad media in repairing America's image, to focus on China as perhaps the single most important focus of that campaign (aside, perhaps, from our erstwhile Atlantic allies), and to begin the effort at once on a modest scale.

I have no doubt that this idea will cause discomfort in some of the offices at the new U.S. Embassy on Nu Ren Jie and in the corridors and break rooms of State Department in Foggy Bottom. All the more reason to begin soon, while the new President still basks in the glow of his historic victory.

November 14, 2008

If you haven't been following the China 2.0 Tour online via Twitter (#china20), you should really check out the site and the linked blogs of all of the participants. They are leaving Beijing tonight and heading for Shanghai to continue their tour.

I have had the opportunity to both run and to take part in many immersion programs seeking to help executives and others learn about China from the ground up. This one was ambitions in both scope and participants: audiences do not get much tougher than a roomful of high-profile bloggers.

But this program went off so well I told The China Business Network's Christine Lu that they need to make programs like this a regular offering to organizations, individuals, and businesses who really want a crash course in the China you do not see on CNN or read about in the papers.

I'm not accustomed to doing plugs here, but if they ever get around to offering such immersion programs, they would be well worth looking into. The kinds of people you meet, the range of perspectives you get, and most important the insights you take away are phenomenal. I fancy myself something of a China specialist and was participating as such, but I probably learned almost as much as the China "n00bs" on the tour.

September 23, 2008

Better writers have covered the Melamine Milk Crisis at great depth already (check out Imagethief's article here as an example, or China Law Blog's coverage) so I won't belabor the story. I do, however, have two points to add, germane to what we've been writing here till now.

The Joint Venture and Ethical Rot

Fonterra, the large New Zealand food cooperative that partnered with Sanlu to manufacture the formula, will be remembered for a long time as a company that allegedly knew about the contamination some weeks prior to the kidney stone outbreak, that, justly or otherwise, reputedly did nothing to either stop the sale of the product or alert authorities. I cannot speak for the veracity of these claims, but they are circulating as if they are the truth.

In the Court of Public Opinion, what Fonterra did and did not know is now immaterial, and if the allegations of inaction are false, the company is going to face an epic and expensive effort in China and elsewhere to repair their reputation. I will not speculate on the cost to the company if the allegations are true.

The lesson of Fonterra is plain: foreign partners in joint ventures have three choices:

1. Pick a China partner of unquestionable operational integrity, and then watch over them like a hawk to ensure they continue to operate in an ethical manner, especially in crises;

2. Pick a China partner of imperfect operational integrity, then cram into every employee the importance of maintaining the public trust over any other consideration;

or my favorite

3. Avoid the joint-venture question entirely to ensure you can set and enforce ethical standards with ease.

Readers of this blog know that I am fond of saying that the Sino-foreign joint venture is a lawyer's dream and a manager's nightmare. Maintaining a semblance of control and a consistent strategy are difficult enough in a JV. In an environment where business ethics and corporate governance are no longer of mere academic importance, yet where moral relativism and the Eleventh Commandment ("thou shalt not get caught") frame individual and corporate codes of conduct, the joint-venture does not lend itself to the cultivation of ethical leadership.

My point is not to absolve Fonterra, Sanlu, or anyone else of any action or inaction because of their corporate structure. Rather it is to sound a warning to companies who are in or are considering a joint venture that these are easy places for ethical lapses to fester unless both partners are committed to setting - and enforcing - high ethical standards. Articulating those standards, training to them, and sticking by them even when there will be hell to pay for doing so is the only way to prepare for a crisis like this, and to have much hope of long-term recovery in its wake.

Quality is Free

When I was fresh out of graduate school, I was thrust into a production management role for which I was somewhat under-qualified. (I'm being charitable, here.) My job was to spend six days a week supervising the outsourced production of accessory furniture across 30 factories in greater China. I had trained in marketing and logistics.

Two things saved me: a deep affection for factories and line workers I gained working teen summers in my dad's investment casting foundry, and Philip B. Crosby's book Quality Is Free: The Art of Making Quality Certain. In the space of less than three hundred readable pages, Crosby gave me a graduate course in managing quality. But what was important was his core point: ensuring quality - and the considerable time, attention, and costs associated with the effort - is where profits come from. Until you stop seeing quality control as a cost center, you will never have passable quality.

Or, as cookie-madam Debbie Fields once said, "good enough never is."

The end result of this upheaval (once the children are healed and the accused have done the perp walk) will be that a few smart companies across China's food sector will see this as an opportunity, and will make major investments in quality assurance, both human and technical. These companies will realize that if nothing else, making investments in inspectors and equipment will be cheaper than regularly yanking product off the shelves.

As Mattel and hundreds of toy retailers learned last year, though, you can't trust quality to the last guy up the supply chain. There has been far too much "trust" and not enough "verify" in handling quality issues out of The World's Factory of late. When I was inspecting furniture in Taiwan, I frequently did it alongside third-party inspectors and buyers from some of my company's largest customers - American retailers. It pissed me off, it was costly for the buyers, but it was the only way to ensure that nothing slipped through.

It would be easy to throw this whole issue on the government, but this crisis has proved once again that business cannot wait for government action. The real lesson of the Melamine Milk Crisis is that quality is everybody's problem, from the farmer to the retailer.

Nota Bene

If you haven't already, you have got to read what David Dayton over at the Silk Road blog is writing about all of this. David is a longtime China and Thailand factory guy. He knows the ugliness around the quality control business, including what it is like to go into a factory and get accused of racism (or worse) for rejecting a critical shipment for quality lapses. In his writing, he's pretty merciless about the issues, but he's absolutely right. I am a certified pollyanna when it comes to China, but not when it comes to quality control.

The price of quality is eternal vigilance. And it is really clear there are lots of people asleep at their posts - or just looking the other way.

September 16, 2008

Over the weekend, The Register ran an a special report on Baidu, alleging that the Chinese search giant is engaged in technological chicanery in order to keep users plugged into vast and illegal reservoirs of online music (h/t maths at Music 2.0). The report is here.

Searching for trouble

The report explains - in forensic detail - how Baidu allegedly continues to make money on illegal downloads while maintaining plausible deniability. A taste:

Baidu's MP3 Search was monitored for six months at the end of last year, analyzing search results using 600 songs spread across multiple genre. A number of areas that seemed incongruous to a pure and neutral search engine were discovered, and three details emerged.

Firstly, a network of mysterious sites with closely related domain names contributed more than 50 per cent of the search links returned by Baidu. The songs hosted on the mystery sites were unreachable except through the Baidu search engine. Furthermore, infringement notifications resulted in unlicensed songs simply moving from one of these domains to another.

Secondly, Baidu does not link to the two leading paid download sites in China, 9Sky and Top100. While Google for example will return results for a song search to licensed providers (7Digital, Amazon, eMusic or even iTunes) as well as Torrent trackers, Baidu is much more selective.

Thirdly, music blogs and forums naturally form a significant source of music search links for any search engine. But with Baidu, these contributed to only 30 per cent of the music search links on Baidu’s MP3 Search.

The cumulative effect is to keep the "free music flowing" for Baidu's users - with devastating consequences not just for creators, but for rival internet businesses.

Even more compelling, the report also suggests that Baidu bullies journalists, publications, and websites into silence about its practices by threats and coercion.

In a superb post, Maths, a digital music advocate and avid China-watcher, builds on The Register's report and asks some penetrating ethical questions, suggesting that if the above allegations are proven true, Baidu's advertisers, investors, advocates, and anyone else working with Baidu in its music efforts are soiled by association.

It matters if the cat is white or black

I'm not quite ready argue for Baidu's conviction in the court of public opinion. The Register's report is only three days old, and I cannot ignore that the company has a list of powerful rivals that grows as it expands its business. Time will tell how valid these allegations are. Their appearance on a global website demands further scrutiny by the music industry, the media and the Chinese authorities.

But let's leave the specific matter of Baidu aside for a moment and examine the larger question.

At what point, we need to ask, does it become unethical to deal with a company that appears to be actively violating the law? Do you take a zero-tolerance approach? Do you wait for a criminal indictment? Do you do your own due-diligence? Or do you simply shrug your shoulders and say "I really don't care what kind of people I do business with, as long as my company makes out on the deal?"

These are not easy questions, but they are an example of the kind of issues a company needs to deal with in advance of doing business in China, or failing that, right now. As I noted in my second post on the iTunes blockage, business in China is a moral and ethical wasteland, so moral quandaries are a part of doing business here. Smart companies address those issues up front with clear guidelines.

As something of a moral absolutist, I know where I'd draw the line, but I recognize that others prefer a more flexible approach. Being a moral relativist in your approach to international business ethics does not mean you don't have ethical standards, however: it just means that every company will have different standards. Each company still need to draw a line, and you need to be able to justify it not only to local audiences here in China, but to your full range of stakeholders around the world.

Failing to do so puts your reputation - and your business - at the mercy of your least ethical partner.

Why are we here?

More important, such issues also give us a precious opportunity to demonstrate that the presence of our companies in China exerts a positive influence on the healthy development of the country and its economy. Either we come to Rome and do as the Romans, or we show up determined to leave the place better than we left it.

Deciding who we will (and will not) do business with - and under what circumstances - lies at the heart of our effect on China.

September 09, 2008

You can understand why many people in the corporate communications gig are still coming to grips with what many people call "Web 2.0," that collective set of online applications that depend on you, me, and other users to create the content. (I prefer calling it "people-generated media," but one buzzphrase is as good as another.) This is, after all, confusing stuff for a marketing craft formed in the comfy crucible of television, radio, newspapers, and magazines.

Sarah Milstein makes a good start in The New York Times, giving some good ideas about how Twitter can be used imaginatively in business. She explains some basics that apply to everyone (share ideas, share knowledge, and show respect), gives several that are imaginative (let executivess and employees Twitter as employees to make the company look with it, run contests, solicit feedback, respond to complaints, advise on status, thank customers.)

My biggest complaint about Sarah's approach is the Screwdriver-Nail Conundrum. Just because you CAN do something with Twitter doesn't mean that it is always the best tool to use (a truism that applies to any communications or marketing tool.)

Experience (and Sarah's article) suggest that there is no set formula for what Web 2.0 tools you should use in business, or how you should use them. Such decisions are not formulaic - they have more to do with your company, its business, its people, and the individuals and entities you need to interact with than the tools itself.

The best advice I can give to anyone about using Twitter (or blogs, or Facebook, or whatever) in your business is to actually go and try it out for yourself. Play with it for a while, get to know it, and then if you need go find somebody to help you figure out if and how it makes sense to use it in your business.

This is especially true when you wander beyond the the U.S. and Canada. Very few new media agencies or advisors in North America come packaged with regional experience or focus (Christine Lu is one of the very few.) The way to use these tools in China requires a more nuanced approach than in the U.S.

July 24, 2008

Much of the work that we foreign-born and foreign-educated types do here in China is of a consulting or mentoring nature. Indeed, if foreigners have any long-term value in corporate China beyond serving as trans-cultural connective tissue , much of it lies in our ability to serve as conduits for soft skills like leadership, creativity, quality control, project management, and the like to the nation's growing ranks of executives and professionals.

A View to a Skill

Success in these roles means mastering an important but poorly-understood skill set. Whether serving as an advisor to the localized operations of a foreign multinational, as a quality inspector in a factory, a consultant to a Chinese firm expanding overseas, or as a mentor to talented young professionals, the way we deliver our counsel is as important - and in some cases, more important - than the information we deliver.

Sadly, the set of skills one requires to be an effective counselor, mentor or consultant is taught in only a tiny number of the world's business schools. It is as if these institutions - training grounds, as it were, for ranks of future consultants - assume that as long as the fundamental business knowledge is duly inculcated into their students, they will somehow magically graduate with the ability to appropriately, tactfully, and effectively passing on their acquired wisdom.

Worse, a discouraging number of professional advisory firms - not just management consultants, but law firms, advertising agencies, accounting firms, I.T. consultancies, and public relations agencies - also give short shrift to teaching advisory skills to their new hires. Off go their consultants, filled with knowledge and wisdom and no idea how to deliver it with the skill and grace to ensure its effectiveness.

The Missing Manual

The prolific professional-services guru David Meister has begun the effort to fill this vast gap, most notably with his work The Trusted Advisor (co-authored with Charles Green and Robert Galford), a book that should be required reading in any advice-giving firm. While providing an incomparable framework for building trust and selling yourself as an advisor, the book falls somewhat short on how to deliver good advice effectively.

Especially missing in Maister's work and that of others is how do deal with the challenge of giving such advice across a cultural divide - a particularly thorny problem here in China.

The good news is that there is a corpus of literature available to help, from the people who have been advising across cultures for decades: the military.

The U.S. military has been sending trained officers and senior non-commissioned officers into the field around the world as advisors to local military leaders since well before World War II. The British have been doing it for even longer than that.

And keep in mind that when these people give advice, it is serious business. When we provide advice, money and companies are at stake. When the military provides advice to senior officers of another country, the stakes are far higher.

Despite the ungainly titles, these are easy and fast reads. The first volume, Advising Indigenous Forces, is largely an exploration of the American experience in advising since Korea. Before you start, set aside whatever political issues you might have with these conflicts or America's role in them - they will only get in the way of you learning from the tactical, on the ground experience of people sent to advise strangers from a foreign culture.

The first two-thirds of the book will recount the experiences in detail so as to set up the last third of the book, which uses the conflicts as a means of deriving some extremely helpful lessons. It is worth slogging through - the insights and advice are poignant.

The second book, Advice for Advisors, is meant as a companion volume to the first, with fourteen supplementary articles fro men who had been advisors in the field, starting with World War I and moving through Iraq. The first article, for example, is "Twenty-Seven Articles" by T.E. Lawrence, more widely known as "Lawrence of Arabia." For reasons that don't bear going into here, I am not a fan of Lawrence, despite having read his book, The Seven Pillars of Wisdom. Nonetheless, his simple list of dos and don'ts elegantly encapsulates his learnings from years of field experience.

Another notable article in this volume is Edward Stewart's "American Advisors Overseas. From his position on the faculty of George Washington University, Dr. Stewart was one of the pioneers in cross-cultural communications and wrote one of the continuing classic texts in the field, and his article underscores how important it is to know your own prejudices and cultural issues before embarking on an advisory effort.

If you are in an advisory or mentoring position - or want to be - these are both worthy additions to your reading list. The price is certainly right (and much cheaper than one of my training courses on the same topic.)

July 21, 2008

In the midst of a discussion about business in China, a friend of mine and I had reached that point in the conversation where the talk was either on the verge of becoming profound or it was about to descend into arcana.

The discourse paused for a moment while the waitress brought our drinks. There was a relaxed pause as we each caught our mental breath.

"I've been meaning to ask you a question for a long time," he said. "Why do you read so much about war?"

Yes, why?

It was one of those questions that slams your brain into a hard left turn, not just because it was a hefty change in the direction of the conversation, but because it cut right into me. With all the books, blogs, papers, webcasts, magazine and newspaper articles on China, business, marketing, strategy, and communications out there, what the hell am I doing studying military science, military history, and international security?

I gave a flippant answer: "I enjoy it," and quickly returned to the previous topic. But there is more to it than just the recreational value.
Truth is, after three decades studying the martial sciences and two decades in business, I have discovered that not only does "studying war" enrich the development of business leaders, but also that a lot of businesspeople and companies desperately need a mental dose of modern military thinking.

Swords into pruning hooks

Let's address the question of morality first, as I am painfully aware that many people equate the study of war with the dangerous propigation of man's warlike instinct.

What is gained from the study of a subject depends entirely on the intent of the student. You can study anthrax with a view to using it to kill others, or you can study it so as to develop a cure, or to eliminate it and other infectuous diseases. In the same way, you can study war to help you plan an insurrection, organize a terrorist network, or invade a country. You can also study war to end an insurgency and what drives it, or defend a country from external threats.

Or you can study war as I do: to gain insights that can be intelligently applied in more peaceful endeavors. In fact, I think studying studying war is a moral imperative, even if the very idea of killing people and breaking things nauseates you - especially if killing people and breaking things nauseates you.

War's immense cost to mankind in blood and treasure through history is staggering. For us to waste any opportunity to derive whatever benefit possible that can be derived from that experience is unconscionable. A moral person may recoil from the ravages of war, yet acknowledge that we are ethically bound to extract from its study any lessons, innovations, models, or giudance that can be put to peaceful, productice, positive use.Business and war

Of all fields that martial endeavors have influenced, perhaps the most compelling - and controversial - is how it influences business.

Drawing equivalence between war and business is an imperfect comparison at best. You may not buy the idea that "business is the moral equivalent of war," but like war business is fundamentally conflict and competition between groups for tangible ends. War is usually kinetic (the military's way of saying that it involves killing people and breaking things), and business is rarely kinetic, but there are enough parallels that key lessons can be shared between the two fields.

War and commerce are both conducted in the face of great uncertainty where the participants usually have a lot - or everything - at stake. Freedom of action is restricted - or enabled - by a series of factors outside the control of the individual. Time is insufficient, resources limited, and stress is high. The cost of failure, while not quite as severe in business as combat, is nonetheless high and very real. Creating the business strategos

The first and most obvious way a study of war can enrich a business mind is in strategy, or, more specifically, helping a businessperson become a strategist - or at least a strategic thinker. In no field is strategy as important - nor the strategic art as well understood - than in the military, and the warrior-scholars (no, that is not an oxymoron) of history have added more good thinking to the field than all of the business thinkers put together.

For example, you probably know people who have read (or who have claimed to read) Sun Tzu's The Art of War. Long before Michael Douglas quoted Lao Sun while playing Gordon Gecko in the film "Wall Street," businessmen were tapping the ancient wisdom to inform their thinking. (Just a thought - anyone who actually did read Sun Tzu and took it to heart would never be caught quoting him. Why, after all let your opponent know how you think?)

The point is that Sun Tzu - a military scientist, after all - probably wrote the capstone text in business strategy, yet he was never even thinking about business. The reason his thinking is accepted in commerce is because generations of businesspeople had the foresight to recognize that good thinking, regardless of its origin, is what you need to succeed in business.But wait...there's more...

So why stop at strategy? (For that matter, I wonder why most businesspeople go no further into the martial realm than Sun Tzu for their strategy, but that's a subject for another post.) There are a host of other areas where the military experience can enrich business thinking.

Take marketing, for example. Jay Conrad Levinson has made a career taking the simple ideas of guerrilla warfare - fighting larger rivals with unlimited resources when you have almost none - and applying them to marketing. Less known (for now) but equally wise Mike Smock has taken the theories of Sun Tzu and strategic visionary John Boyd and incorporated them into his Attack Marketing approach.

Just as marketing can benefit from a little martial thinking, so can consulting, managing global and dispersed enterprises, communications (internal and external), event management, and a host of specialty areas like medicine, telecommunications, and network theory.

There are entire spheres of business operations where the armed forces - especially those of the west - continue to match if not lead enterprise in the development of new thinking and approaches. Logistics and supply chain management, recruiting, training, intelligence, staff functions, career management, and creating and optimizing teams are areas where business owes much to the constant developments in these fields being driven by the armed forces.Still not convinced?

You may be thinking "hey, aren't military types the thick-headed dudes we saw in ROTC who went into the armed forces because they couldn't get into grad school?" While I can't speak for your experience, understand that it's easy to be opinionated when your opinions aren't going to get people killed. The looming specter of death, defeat, and dishonor can turn a rigid thinker into an open-minded scholar awfully quickly.

Warriors become thinkers by necessity, not by preference. It is fair to say that the United States Marine Corps, for example, is a superb example of The Learning Organization. (Does your company produce a recommended professional reading list that covers each level of the organization? No? The Marines do, and the program has been so effective that all of the rest of the US armed services have picked up the practice.)

Even if you don't buy the whole business-war parallel, I urge you to pick up the book The Medici Effect. Frans Johansson describes how incorporating ideas from fields unrelated to your own with issues in your own area are a tested and accessible path to innovation. The application of, say, a new history of the Battle of Midway to your day-to-day work may seem counterintuitive, but I'm 100 pages into the book and I've gained insights into Japanese institutional dynamics that for me opened a whole new vista on Asian management. That's "The Medici Effect" at work.All the help we can get

Globalization and the tempo it forces on us has made doing business insanely complex. You especially feel this in China, where the pace is brutal and the conditions in constant flux. Against that context, and particularly as we pause at the edge of what look to be even harder times ahead, we are foolish to ignore any rich vein of insights and approaches to difficult problems.

July 18, 2008

As we watch these global arguments around whether heads of state should come to China for the Olympic opening ceremonies, another question rears its head in the shadows: where are all of the CEOs? And not just around the Olympics, but generally?

There has been a noticeable dropoff in the visibility of the multinational CEO in China. Part of this is the result of growing restrictions on the time national leaders spend in the presence of non-Chinese business executives, which itself is partly the result of the falling priority Chinese policymakers assign to foreign investment.

I sense, however, that there is more to it than this. Market access is no longer as problematic as it once was. Corporate focus has shifted to the day-to-day conduct of business, and many executives have likely convinced themselves that it is not as important to come to China as it once was.

One immediate example: as Apple opens their first China store in Beijing this week, Steve Jobs could not be bothered to decamp beautiful metropolitan Cupertino to attend the opening, much to Apple's loss. (We in the Hutong fervently hope that this is not for health reasons, and if it is, respectfully withdraw the preceding comment.) But Apple is not the only guilty party. The CEO who regularly comes to China (i.e., more than once per year) is the exception, not the rule.

That by itself is shortsighted. But I submit that much more is needed.

Put your butt where your business is...or will be

I am a huge fan of self-education generally, and I think that learning about China via books, web sites, blogs [see my blogroll], magazines, podcasts and other formats is a huge help to give yourself a strong foundation, maintain a clear view of China's evolving context, and stay current when you cannot be here.

For someone interested in China as a tourist or as an intellectual exercise, that and the occasional trip would be sufficient.

But for an individual who is counting on China as a significant chunk of his or her company's future, simply popping in now and again isn't enough. I discussed this at length with Christine Lu at China Business Network in a recent podcast, so I won't repeat it all here, but two points bear discussing - one that I made in the chat, one that I thought of later.

First, such a long parade of CEOs have aped key phrases like "how important China is to our company" and "how committed we are - and I am personally - to China" that those words have become platitudes. Officials and Chinese consumers alike simply ignore them. If you want to make it clear you are committed to China, you have to stop talking and start doing.

The best way I can think of proving that - better even than a monetary investment - is physical location. If China is so important to your company, Mr. Chairman, then transfer the flag. Take advantage of modern technology and the host of magnificent places of lodging and living and move to China for a bit.

Is China 40% of your business? Can it become 40% of your business? Then pack the bags and come spend 4 months a year here. I guarantee you that the insights, relationships, and brand value you get in the process will make it well worth your while.

MBWA is not about frequent flyer miles

Second is a lesson from Tom Peters - the best way to run a business is to spend as little time as possible at headquarters. Peters called it "managing by walking around." To Wal-Mart founder Sam Walton, it meant four-and-a-half days a week on the floors and stockrooms of his stores and distribution centers. To my dad, it meant spending about six hours a day on the factory floor, and most of the rest with customers.

To an executive running a global business today, it means getting on the plane and renting long-stay suites in countries that may not offer the creature comforts you're used to. Suck it up. Sure, you have great people running your offices, branches, and subsidiaries around the world. This is not about them. This is about you having an instinctive feel for the market so that your smart people on the ground can spend their time winning and keeping business, not giving you an extended course in China 101.

Elsewhere on the net

I also had a chance to talk to ChinaONTV about the China ICT conference, where I was a substitute moderator. Not quite as insightful an interview, but I really enjoyed my time at the conference and thought it stood out above a lot of the local tech confabs. Try this link if you're in China, and this one if you're not.

June 12, 2008

The death of Aloha Airlines can be used as an allegory for many things, but the lesson I take from it is that we as consumers need to rethink the role we play in the world.

It's all fine and good to say "hey, I'm going to go over here and buy stuff because it is cheaper." That's the way we've been taught, and for many of us the need to save money is a matter of life and death.

How low do we need to go?

But a large and growing number of consumers around the world aren't going for "everyday low prices" because it means the difference between eating and not eating, or between having new clothes and going naked. For many, the issue is a matter of being able to buy what we need, and being able to buy a whole lot of things that we don't really need.

When we were in Honolulu a month ago, we wandered over to the Wal-Mart behindAla Moana Center, about two kilometers from our hotel in Waikiki. Prices were, frankly, really low, and when you walk into a place where decent quality is available at an irresistible price, a little gland in the back of your head fires and suddenly you are filling the cart with a ton of stuff that you don't really need. Think impulse buying on a grand scale that continues right up to the checkout line.

The Party Secretary then did a triage on the cart, and we wound up "restocking" a significant chunk of the items that we had grabbed that we did not have on our list when we walked in the store. But we still bought stuff that frankly, we didn't need.

And that is the upside to everyday low prices. We buy stuff we don't need because it is cheap, and we not only institute the Wal-Mart Effect, we also bring about unintended consequences in the form of waste, environmental damage, questionable labor practices, and businesses of all types driven into hardship, bankruptcy, or dissolution.

So long, and thanks for the trips

And such was the case with Aloha Airlines. People saw the near term benefit of $29 interisland airfares that on the U.S. mainland would have undercut Southwest airlines by 65%. They ignored the long-term problem of destroying a business upon which much of the Hawaiian economy depends. And they were warned.

Oh, sure, there are still plenty of planes flying around Hawaii, but they are smaller (meaning more flights to carry the same number of people) and have no belly space (meaning the island lost critical cargo capacity to support not only its businesses, but that would drive up prices on everyday goods to everyone in the islands.)

Time for Consumerism 2.0?

And service quality will decline. How many Californians old enough to remember the days of Pacific Southwest Airlines and AirCal would love to have those two airlines back, instead of USAir and United Shuttle? And how many of us would be willing to pay an extra $30 on a round-trip to have it?

I've always been something of a Milton Friedman laissez-faire capitalist. I am all in favor of creative destruction wreaked by the market.

But I'm starting to realize that when we enable creative destruction, we have to use a little more foresight and understand exactly what it is we are destroying. The hidden hand will not ensure that creative destruction will not destroy something worth saving - we will, as consumers.